BILL ANALYSIS Ó SENATE COMMITTEE ON BANKING AND FINANCIAL INSTITUTIONS Senator Marty Block, Chair 2015 - 2016 Regular Bill No: AB 557 Hearing Date: July 1, 2015 ----------------------------------------------------------------- |Author: |Irwin | |-----------+-----------------------------------------------------| |Version: |May 28, 2015 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- Subject: Nonprofit corporations: abatement: dissolution: surrender. SUMMARY Creates a streamlined administrative dissolution and surrender process for nonprofit corporations, as specified. DESCRIPTION 1. Contains legislative findings regarding the cumbersome and protracted process involved in dissolving a nonprofit corporation's affairs and the importance of ensuring that nonprofits which have been suspended or have forfeited tax-exempt status are no longer able to do business in the state or solicit donations from unsuspecting Californians. 2. Provides that a nonprofit mutual benefit, nonprofit public benefit, nonprofit religious, or foreign nonprofit organization that has qualified to transact intrastate business is subject to administrative dissolution or administrative surrender if, as of January 1, 2016 or later, the nonprofit corporation's or foreign corporation's corporate powers are and have been suspended or forfeited by the Franchise Tax Board (FTB) for at least 48 continuous months. This administrative dissolution/surrender process works as follows: a. Prior to the administrative dissolution or administrative surrender of the nonprofit corporation or AB 557 (Irwin) Page 2 of ? foreign corporation, the corporation must be notified of the pending dissolution or surrender, as follows: i. FTB must mail written notice to the last known address of the corporation, as specified. ii. FTB must transmit the names of corporations subject to the administrative dissolution or surrender provisions to the Secretary of State (SOS). iii. The SOS must provide 60 calendar days' notice of the pending dissolution or surrender on its web site by listing the corporation name and the SOS's file number for the corporation. The SOS must also provide instructions on its web site for how a corporation wishing to submit a written objection to the pending dissolution or surrender would do so. A corporation wishing to object must submit a written objection to the FTB; the FTB must then notify the SOS that such an objection has been submitted. b. If no written objection to the dissolution or surrender is received by the FTB during the 60-day period to object, the corporation is administratively dissolved or surrendered. c. Upon administrative dissolution or surrender, the corporation's liabilities for qualified taxes, interest, and penalties are abated; any actions taken by FTB to collect that liability must be released, withdrawn, or otherwise terminated by the FTB, and no subsequent administrative or civil action may be taken to collect all or part of that amount. Any amounts erroneously received by the FTB may be credited and refunded, as specified. d. If written objection to the dissolution or surrender is received by the FTB during the 60-day period to object, the objecting corporation has 90 days from the date its objection is received by the FTB to pay or otherwise satisfy all accrued taxes, penalties, and interest and file a current Statement of Information with the SOS. If these conditions are satisfied, the AB 557 (Irwin) Page 3 of ? dissolution or surrender is cancelled. If these conditions are not satisfied, the dissolution or surrender occurs on the 90th day following the date of FTB's receipt of the written objection, unless that date is extended by the FTB. e. If the nonprofit corporation or foreign corporation is administratively dissolved or administratively surrendered, the liability of the corporation and of the directors or other persons related to the corporation to creditors, if any, is not discharged. f. The administrative dissolution or administrative surrender of a nonprofit corporation or foreign corporation does not diminish or adversely affect the ability of the Attorney General (AG) to enforce liabilities as otherwise provided by law. 3. Provides, under the Nonprofit Public Benefit Corporation Law, Nonprofit Mutual Benefit Corporation Law, and Nonprofit Religious Corporation Law, that, when a corporation has not issued any memberships, a majority of the directors, or, if no directors have been named in the articles of incorporation or elected, the incorporator or a majority of the incorporators, may sign and verify a certificate of dissolution, as specified, and may file that certificate of dissolution with the SOS within 24 months of filing its articles of incorporation. The SOS must notify the FTB of the dissolution. Once that certificate of dissolution is filed with the SOS, the corporation is deemed dissolved, and its powers, rights, and privileges cease. Notwithstanding the dissolution of a corporation in this manner, the liability of the corporation or its directors or other persons related to the dissolved corporation is not discharged, and the dissolution of a corporation pursuant to this procedure does not diminish or adversely affect the ability of the AG to enforce liabilities as otherwise provided by law. 4. Requires FTB to abate, upon written request by a qualified nonprofit corporation, unpaid qualified taxes, interest, and penalties for the taxable years in which the qualified nonprofit corporation certifies, under penalty of perjury, that it was not doing business. AB 557 (Irwin) Page 4 of ? a. Defines a qualified nonprofit corporation as a nonprofit public benefit, nonprofit mutual benefit, or nonprofit religious corporation or a foreign nonprofit corporation that qualified to transact intrastate business in California and that either had its tax-exempt status revoked, as specified, or was never doing business in California at any time after its incorporation in California. b. Defines qualified taxes, interest, and penalties as minimum franchise tax and associated penalties and interest for nonpayment of that tax. Qualified taxes do not include unrelated business income tax (i.e., tax associated with activities unrelated to the nonprofit mission of the corporation) or tax imposed on income sourced in California but not related to business conducted in California or the interest and penalties associated with those taxes. c. Requires the qualified corporation to establish that it has ceased all business operations at the time of filing the request for abatement of taxes, interest, and penalties, and conditions the abatement of taxes, interest, and penalties on the dissolution of the qualified corporation within 12 months from the date the request for abatement is filed. d. Provides that if the qualified corporation is not dissolved within 12 months from the date of filing the request for abatement or restarts business operations at any time after requesting abatement, the abatement is cancelled, and the taxes, interest, and penalties subject to that abatement are treated as if the abatement never occurred. EXISTING LAW 5. Establishes the rules for dissolving different types of nonprofit corporations, as follows: a. When a nonprofit public benefit corporation or nonprofit mutual benefit corporation has been wound up without court proceedings, a majority of the directors AB 557 (Irwin) Page 5 of ? then in office must sign and verify a certificate of dissolution stating that the corporation has been completely wound up; that its known debts and liabilities have actually been paid or adequately provided for, or that it has incurred no known debts or liabilities; that the corporation is dissolved; that all final returns required under the Revenue and Taxation Code have been or will be filed with FTB. The certificate of dissolution must be accompanied by a written waiver of objections to the distribution of the corporation's assets issued by the AG or a written confirmation from the AG that the corporation has no assets. The certificate of dissolution and attachment must be filed with the SOS. The corporate existence ceases upon acceptance by the SOS of the filing. The SOS is then required to notify FTB of the dissolution (Corporations Code Sections 6615 and 8615). b. When a nonprofit religious corporation elects to wind up and dissolve, it may do so either by approval of a majority of the members or by approval of the board and approval of the members, as specified. All of the corporation's assets must be disposed of on dissolution in conformity with its articles or bylaws, subject to complying with the provisions of any trust under which such assets are held. The disposition of assets may be made without decree of the superior court, if the AG makes a written waiver of objections to the disposition of assets. Nonprofit religious corporations are generally subject to the same rules for dissolution as nonprofit public benefit corporations, summarized immediately above (Corporations Code Section 9680). c. When a foreign corporation that has qualified to transact intrastate business wishes to surrender its right to engage in business in California, it must file a certificate of surrender signed by a corporate officer or trustee, stating that it surrenders its authority to transact intrastate business and that a final franchise tax return has been or will be filed with the FTB, as specified. The SOS is then required to notify the FTB of the surrender (Corporations Code Section 2112). COMMENTS AB 557 (Irwin) Page 6 of ? 1. Purpose: AB 557 is intended to create a process to "rid the books" of nonprofit organizations that either never launched or are no longer operational, saving the SOS, FTB, and AG the time and money involved in attempting to register, tax, and audit these organizations. 2. Background: Under existing California law, the SOS, FTB, and AG share jurisdiction over the administration and taxation of nonprofit organizations. The SOS administers the incorporation process and ensures that nonprofit corporations adhere to the missions for which they form. The FTB evaluates, reviews, and monitors the state tax-exempt status of nonprofit corporations. The AG regulates nonprofit organizations that administer or solicit charitable funds or assets and has broad legal and statutory authority to commence enforcement actions for improper activities. According to this bill's author, the current process to dissolve a nonprofit corporation is very cumbersome, time consuming, and inefficient. In order to dissolve, a nonprofit corporation must first prepare and file a Certificate of Election to Wind Up and Dissolve. Nonprofit public benefit, mutual benefit, and religious corporations holding charitable assets in trust must then request a waiver of objections from the AG before disposing of any remaining assets. In order to obtain this waiver, the corporation must submit information detailing the persons to whom the remaining assets will be distributed; a signed Certificate of Dissolution; a copy of the corporation's federal tax returns for the last three accounting periods; and an endorsed filed copy of the corporation's articles of incorporation, including any amendments. Once it receives a letter from the AG waiving objections to the distribution of assets or confirming that the corporation has no assets, the corporation must mail a final dissolution packet to the SOS, containing the letter from the AG and the executed Certificate of Dissolution. Once the SOS processes the corporation's paperwork, the corporation is completely dissolved, and its corporate existence ceases in California. However, the organization AB 557 (Irwin) Page 7 of ? must still submit a final notice of dissolution to the AG. This submission must include a copy of the Certificate of Dissolution filed by the SOS or written confirmation that the Certificate of Dissolution has been filed with the SOS and the final financial report for the corporation showing that all assets were distributed properly, resulting in a zero balance. It is only after this final submission that the dissolved corporation ceases to be subject to the minimum franchise tax. Because of this cumbersome process, it is estimated that close to 60,000 of the 150,000 nonprofit corporations currently "on the books" in California are eligible for the administrative dissolution process that AB 557 seeks to establish. 3. Discussion: AB 557 is virtually identical to AB 1529 (Perez) from 2013, a measure that was vetoed by Governor Brown. In his veto message, the Governor stated, "This bill would make it easier to dissolve a nonprofit corporation. Implementing this bill, however, will require expensive reprogramming of an obsolescent computer system that will soon be replaced. It would be better to make this change when the new computer system is being designed." Assemblymember Irwin, author of AB 557, believes that the May 28, 2015 amendments to her bill resolve the concerns that led to the Governor's veto. 4. Summary of Arguments in Support: a. The California Taxpayers Association (Cal-Tax) not only supports the bill, but urges lawmakers to expand the administrative dissolution and surrender process to all legal entities, not just nonprofit corporations, as other states like Colorado, Georgia, and Missouri have done. In support of the bill, Cal-Tax observes that "there is a significant problem with for-profit and not-for-profit organizations filing incorporation and registration papers with the SOS, and then failing to launch their operations without formally dissolving or surrendering. The result is a massive accounts receivable sitting on the state's books that will never be collected. To properly unravel, such entities must spend considerable amount of time and expense, and go through a cumbersome AB 557 (Irwin) Page 8 of ? reviver process with the state, and then go through the dissolution/surrender process. If an entity does not pay its tax liability, it generally is difficult, if not impossible, for the FTB to hold individual owners personally liable for the unpaid tax. Unlike sales and payroll tax liabilities, the obligation to pay income and franchise tax begins and ends with the entity in most circumstances. "The new administrative dissolution/surrender process to be created by AB 557 would allow the FTB and SOS to formally dissolve/surrender nonprofit entities that have been determined to be inactive. For many of these entities, their boards of directors disbanded years earlier, but never took the proper steps to dissolve/surrender the entity, thus causing years of taxes, penalties, and interest to accrue. Further, the FTB and SOS spend an inordinate amount of time and resources administering the dissolution/surrender process. By streamlining the process to dissolve/surrender defunct nonprofits, AB 557 would help the FTB and SOS to clear away the backlog of inactive nonprofit corporations, and save precious state resources." b. The California Society of Enrolled Agents writes, "often taxpayers form business entities that never get off the ground, sometimes by attending a seminar. The taxpayers barely remember forming the entities, do not file the right paperwork to keep the entities alive, and definitely do not have the funds to first revive the entity, which must happen in order to properly close the entity. The cost of revivor, which includes paying the annual/minimum tax for each year, including penalties, is too costly for many. Additionally, these 'phantom receivables' should not be carried in the state's Accounts Receivable, as most of the accounts will never prove collectible." CSEA joins Cal-Tax in viewing AB 557 as a good first step to expanding the administrative surrender/dissolution process to all entities, not just nonprofits. 5. Summary of Arguments in Opposition: None received. 6. Prior and Related Legislation: AB 557 (Irwin) Page 9 of ? a. AB 1529 (Perez), 2013-14 Legislative Session: Virtually identical to AB 557. Vetoed by Governor Brown. LIST OF REGISTERED SUPPORT/OPPOSITION Support California Taxpayers Association California Society of Enrolled Agents Opposition None received -- END --